Thursday, January 14, 2010

Google versus China

My friend HKHam posed a good questions yesterday (via Twitter): #googlecn sure had business problems in China, but surely being the world's biggest country's second biggest search engine still had value?

I find the Google versus China situation fascinating and things should heat up further once China’s official stance becomes clearer. In the meantime, like HKHam, I’ve been trying to get my head around the economics of Google’s actions. What on earth were the boys in Mountain View thinking when they decided to take on China?

From an ethical perspective, I totally support Google’s decision to cease censorship of its Chinese search engine. However, it’s clear that this decision was not made based on ethical (or political) considerations. Google has been censoring its search engine since Google.cn was launched in 2006.

Back in 2006, Google executives said they had weighed the positives and negatives and concluded Chinese Internet users were better off with the neutered Google than with no Google. For security reasons, they did not bring any other Google products containing users' personal information, such as email and blogging, into China.

At face value, this is a corporation placing an embargo on a Country, in retaliation for politically driven actions (alleged email hacking), to force policy change. You could, at a stretch, argue only a company of Google’s stature has the ability and influence to take such a stance against China - most other countries, at this time, realise it would be economic suicide to take such actions.

As nice as it is to imagine Google’s executives benevolently making decisions for the good of the world, that’s not what happened. First off, this is not how you do business in Asia, particularly China. Putting public pressure (via an English language blog) on the Chinese Government is sure fire way to have the great firewall slammed shut in your face.

Further, it appears that Google.cn executives were not briefed about Google’s decisions until the twelfth hour. This would suggest Google were not working closely with Chinese officials on this matter, rather this is a conscious scorched earth move from HQ and they have tried to keep their local employees clean to minimise the repercussions.

Ok, back to HKHam’s point. Google.cn were doing ok in China right? According to web analytics company StatCounter, at the end of 2009, Baidu held 56% of the Chinese market compared to Google’s 43%. Other agencies put Google’s share at slightly less, but even so, that’s a pretty good place to be, in a country with oodles of growth potential.

Google has argued that it’s operations in China were immaterial to its business. Ok, sure, but the business case for China is always about potential growth.

The difficult to measure nuance on Google’s position in China is the way many people in China perform searches. My ex-work colleagues in China would use Google.cn and Baidu interchangeably for simple searches, but if they were after something complex (we’re talking finance related products here, nothing political), they would access google.com through a proxy, which doesn’t show up in the search analytics results. Maybe Google is hedging its bets that as long as it is the global search leader, the Chinese people will find ways to access its product?

That said, it’s still hard not to be cynical are argue that this is a scorched earth move, aimed at buying Google some good will in the rest of the world. As Google itself has stated, the catalyst for all this is that the gmail accounts of a number of Chinese human rights activists were hacked. This means gmail’s security was compromised and its source code could have been copied and/or hacked. This is mission critical stuff. If Google becomes compromised, it will lose credibility and its global business model will go down the toilet. With that in mind, Google’s actions make pretty good sense from a business perspective, regardless of the growth potential in China.

China’s official reaction is yet to be made. Let’s see how this all pans out.

1 comment:

Strong post, Simon. But all we can really do is speculate at the moment, right?

Certainly, this wasn't an entirely ethics-driven decision, but I don't think it was a business-dominated one, either.

I think the role ethics played was significant, because this was just another frustration in a series of compromises and frustration caused by the Chinese government. I think, ultimately, Google (probably Sergey Brin, who has bridled against human rights oppression since leaving Russia at a young age) was just really, really pissed off.

The fact they are second placed and not making that much money (yet) in China, definitely would have made that decision easier. But as I was getting at in that tweet: second place in the world's biggest internet market -- with perhaps the world's biggest growth potential -- isn't a bad spot to be.

About Me

I was born in 1979, the son of two medical professionals. I grew up in good health in Wellington, New Zealand, a city known for being a high earthquake risk area and the capital of a nation nobody can place on a map.
Due to a lack of imagination I completed bachelor degrees in law and economics from Victoria University of Wellington and a graduate diploma in finance from the Financial Services Institute of Australia. To pay off my then ridiculous student loan, I became a corporate whore and worked for four years in NZ at a major financial services firm, specialising in financial modeling, valuation advice and public finance consulting.
In 2008 I moved to Hong Kong and offered up my soul to the lords of merges and acquisitions. I worked non-stop for two years in corporate finance, specialising in deal structuring, lead transaction advisory and financial due diligence. Then in early 2010, I realised that a career in finance was not for me.
So instead I’ve set about rediscovering myself as a writer, designer and game developer ... keep an eye on this space as the story continues.